Question-   Question 1 You have been given the following information about the housing market for two-bedroom rental units in Vancouver:

Solution-

Question 1

You have been given the following information about the housing market for two-bedroom rental units in Vancouver: Rent ($ per month) Quantity Demanded (in thousand) Quantity Supplied (in thousand) 700 30 0 800 27 3 900 24 6 1000 21 9 1100 18 12 1200 15 15 1300 12 18 1400 9 21 1500 6 24 1600 3 27 1700 0 30 a. Draw a supply and demand graph to illustrate the housing market above and show equilibrium rental price and the equilibrium quantity of housing in the graph. Answer: 0 200 400 600 800 1000 1200 1400 1600 1800 0 5 10 15 20 25 30 35 b. Suppose that a price ceiling of $1,000 rent per month is imposed in the Vancouver housing market, what will be the effect of this on housing market in Vancouver? Show in graph and explain. Answer: At price ceiling, Qd=21 and Qs = 9. There will be shortage of 12,000 rooms in the market as shown in the following graph. c. Suppose that a price floor of $1,400 rent per month is imposed in the Vancouver housing market, what will be the effect of this on housing market in Vancouver? Show in graph and explain. Answer: At price floor $9, Qs=21 and Qd=9. There will by Surplus/Access Supply of 12000 rooms in the market as shown in the following graph. 0 200 400 600 800 1000 1200 1400 1600 1800 0 5 10 15 20 25 30 35 shortage d. Suppose that a price ceiling of $1,300 rent per month is imposed in the Vancouver housing market, what will be the effect of this on housing market in Vancouver? Show in graph and explain. Answer: No effect on Market because price ceiling is above market price. A firm can offer lower price than ceiling price. 0 200 400 600 800 1000 1200 1400 1600 1800 0 5 10 15 20 25 30 35 Rent ($ per month) Rent ($ per month) 0 200 400 600 800 1000 1200 1400 1600 1800 0 5 10 15 20 25 30 35 Rent ($ per month) Rent ($ per month) surplus e. Suppose that the government imposed a tax of $200 on homeowners/landlords, who will pay this tax? show and explain in graph (in part a, above) Answer: Tax imposed on landlord, will shift supply curve upward by $200. Tenants will pay $1300. This means tenants will pay $100 tax. Landlord will receive $1100. This means landlord will also pay $100 tax. f. Suppose that the government imposed a tax of $200 on homeowners/landlord, show and explain the effect on consumer surplus, producer surplus, Dead Weight Loss, government revenue and market efficiency. Answer: 0 200 400 600 800 1000 1200 1400 1600 1800 0 5 10 15 20 25 30 35 Rent ($ per month) Rent ($ per month) 0 200 400 600 800 1000 1200 1400 1600 1800 0 5 10 15 20 25 30 35 Rent ($ per month) Rent ($ per month) i. Consumer surplus: Reduce as shown in green. ii. Producer surplus: Reduces as shown in yellow. iii. Dead Weight Loss: Shown in red. iv. Government revenue: Shown in black. v. Market efficiency: Total rooms reduced from 15,000 to 12,000. g. Why would the city of Vancouver impose rent controls? Answer: To help tenants, lower income group and weak strata of the society. h. Who are rent controls meant to help? Does it help those people that it is intended to help? Answer: The government wants to help tenants. Actually, the existing tenants who already occupied homes get help but future tenants suffer because it creates shortage in the market and even ready to take house on high rent in the black market. i. Do you agree or disagree with the use of government-imposed rent controls? Explain (Your opinion) Answer: Opinion can be different j. How can government intervene in free market? Write only government entry/interventions strategies. Answer: • Price Control Policies (Price Ceiling and Price Controls) • Taxes • Quotas and subsidies Question 2 “Luxuries goods such as car and boats have elastic demand. The sellers of these items pay most of the tax”. Show and explain this statement with the help of hypothetical demand and supply graph. Answer: D is demand curve for Luxuries goods (boat and cars) which is elastic, and S is the supply curve. When government imposed taxes, Buyers pay less and Sellers pay more as shown in the following graph. Question 3 1. Suppose that business travelers and vacationers have the following demand for airline tickets from Toronto to Vancouver: (20 marks) Price Quantity Demanded (business travelers) Quantity Demanded (Vacationers) $ 150 5000 tickets 4,000 tickets $ 200 4,500 2500 $ 250 4,000 1500 $ 300 3,500 1000 a. As the price of tickets rises from $150 to $200, what is the price elasticity of demand for: (i) Business travelers Answer: ΔQ= 5000-4500 = 500 Qave = 5000+4500/2 = 4750 = 500/4750 = 0.105 ΔP = 150-200 = -50 Pave = 150+200/2 = 350/2 = 175 - 50/175 =- 0.285 Elasticity = 0.105/-0.285 = -0.37 Demand is inelastic because 0.37 less than 1 and we will ignore - sign (ii) Vacationers Answer: ΔQ= 4000-25000 = 15000 Qave = 4000+2500/2 = 3250 = 1500/3250 = 0.462 ΔP = 150-200 = -50 Pave = 150+200/2 = 350/2 = 175 - 50/175 =- 0.285 / / ave ave Q Q p p   =  Elasticity = 0.462/-0.285 = -1.62 Demand is elastic demand 1.62 because greater than 1 and we ignore - sign b. Which traveler has elastic demand? Answer: Vacationer traveler has elastic demand because it 1.62. c. Why vacationers have a different elasticity from business travelers? Answer: Business traveler has inelastic demand because they do not respond to change in price or tickets as they have business and cannot change their business trip even if price of ticket rise or fall. However, vacationer traveler has elastic demand because they respond more when there is change is price of air tickets

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